Flood decision has potential to unleash a torrent of claims
Flood claims have been thrust back into the spotlight with a recent decision handed down by the Supreme Court of Queensland. The plaintiff, a medical supplies company, operated out of premises at Milton in Brisbane. Like much of Brisbane, the plaintiff’s premises was inundated on 11 January 2011. The inundation was caused by both local run off along with water from the Brisbane River that back flowed through two stormwater drains situated near the premises.
As a result of the inundation, the plaintiff suffered loss and damage. It sought to be indemnified in respect of such loss under its policy with Allianz. The policy included a flood exclusion. For the purpose of the exclusion, flood was defined as:
“...the inundation on normally dry land by water overflowing from the normal confines of any natural watercourse of lake (whether or not altered or modified), reservoir, canal or dam”.
While the water that inundated the premises was a mixture of stormwater and water from the Brisbane River that had back flowed through the pipes the plaintiff conceded that river water represented the dominant source of the water.
The issues in dispute narrowed down to whether the stormwater pipes constituted an altered or modified natural water course or canal, and whether it could be said that the water that inundated the premises had overflowed from the normal confines of the Brisbane River. The first issues were disposed of easily. The court found that the stormwater pipes did not constitute a modified or altered natural watercourse. Similarly, the court held that underground stormwater pipes do not fall within the ordinary meaning of a canal.
The issue then became whether the water that back flowed through the pipes was water that overflowed from the natural confines of a watercourse. The court resolved this issue by adopting a narrow construction of the phrase. As the pipes were held not to constitute the normal confines of the river it followed, according to Jackson J that water that back flowed from the pipes could not be water that had overflowed from the natural confines of a watercourse. This result was not altered by the fact that the ultimate source of that water was a natural watercourse. Consequently, Allianz was found not to be entitled to rely on the flood exclusion to decline the claim.
While the decision will undoubtedly excite advocates for insureds, its application is likely not to be as universal as some in the industry fear. The court expressly acknowledged that the outcome of the matter turned on the language of the specific flood exclusion. It was for this reason that Jackson J somewhat surprisingly made no reference to the existing body of case law regarding flood claims. Accordingly, the impact of the decision will need to be assessed on a case by case basis.
As most in the industry is aware, section 37B of the Insurance Contracts Act operates to insert a standard definition of flood into prescribed contracts. To the extent that it is relevant, the definition provides that flood now means the covering of normally dry land by water that has escaped or been released from the normal confines of a lake, river, creek or other natural watercourse (whether or not it has been altered or modified), or from a reservoir, canal or dam. While the court in LMT Surgical emphasised that the application of flood exclusions will vary depending on the particular wording of the exclusion, it is arguable that the result would have been different had the standard definition applied. “Escape” is a broader term than “overflows” in that it envisages a range of means by which water might leave a watercourse as opposed to “overflow” which tends to connote the overtopping of banks. This broader meaning supports an argument that water from the overflow of a river that backflows through stormwater pipes constitutes water that has escaped the confines of the watercourse.
The decision in LMT Surgical stands in contrast to the position taken by the Financial Ombudsmans Service (FOS). FOS took the view that water from a watercourse that back flowed through stormwater pipes constituted flood water. Such a view avoids the paradox of flood water altering its character as a result of its journey through stormwater pipes (in that flood water, being water that has escaped or been released from the normal confines of a natural watercourse, enters the stormwater pipe at one end, but what emerges at the other end is something other than flood water).
We understand that Allianz is considering appealing the decision.
The UK government has taken a different approach to the provision of flood cover. In the face of an increasing number of flood claims, property owners in high risk areas were confronted with the possibility of unaffordable premiums. Against this background, the industry and the government entered into negotiations on how best to address the issue. This has resulted in an agreement to establish Flood Re, a fund designed to cover the cost of flood claims arising from high risk properties. Flood Re will be funded by a levy that will be added to all insurance premiums. This sharing of the cost of insuring high risk properties has the advantage of avoiding the adversarial aspects of flood claims but possibly fails to achieve the desirable policy outcome of causing people to think twice before building in flood prone areas.
As Flood Re is not expected to be established until June 2015, insurers have agreed to continue to offer flood cover to all home owners in the meantime.